further argue that the arbitration clause itself is unenforceable because its format does not conform to the regulations governing arbitration clauses promulgated by the CFTC.
The defendant argues in response that its Customer Account Agreement is not a "futures contract", but a "leverage contract" as defined in § 19 of the CEA, 7 U.S.C. § 23. Leverage contracts, although subject to regulation by the CFTC, are not required to be traded on a designated contract market. Defendant further argues that the CFTC regulations governing arbitration, 17 C.F.R. § 180.1 et seq., by their terms apply only to futures contracts, not leverage contracts.
In my judgment, I need not determine at this juncture whether the FNMC Customer Account Agreement is a futures contract or a leverage contract. Regardless of how one characterizes the agreement, I do not believe that the arbitration clause is enforceable under the circumstances in this case.
It is well established that federal policy favors arbitration as a means of resolving disputes. H. Prang Trucking Co., Inc. v. Local Union No. 469, supra, at 1239. The Federal Arbitration Act, 9 U.S.C. § 1 et seq., implements this policy. Section 2 of the Act provides that a written arbitration clause "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." A judicially created exception to the Arbitration Act has been established, however, in cases involving protective federal legislation. See, e.g., Wilko v. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168 (1953) (securities); Applied Digital Technology, Inc. v. Continental Casualty Co., 576 F.2d 116 (7th Cir. 1978) (antitrust); Allegaert v. Perot, 548 F.2d 432, 437 (2d Cir.) cert. denied, 432 U.S. 910, 97 S. Ct. 2959, 53 L. Ed. 2d 1084 (1977) (bankruptcy); Beckman Instruments, Inc. v. Technical Development Corp., 433 F.2d 55 (7th Cir. 1970) cert. denied, 401 U.S. 976, 91 S. Ct. 1199, 28 L. Ed. 2d 326 (1971) (patent); cf. Alexander v. Gardner-Denver Co., 415 U.S. 36, 94 S. Ct. 1011, 39 L. Ed. 2d 147 (1974) (Title VII claim). Implicit in this line of cases is the principle that the arbitral forum is not adequate to effectuate the policies underlying protective legislation.
The protective legislation exception comes into play when there is a conflict between the competing fundamental policies of "federal statutory protection of a large segment of the public, frequently in an inferior bargaining position, and encouragement of arbitration as a 'prompt, economical and adequate solution of controversies.'" American Safety Equipment Corp. v. J.P. Maguire & Co., 391 F.2d 821, 826 (2d Cir. 1968) (quoting Wilko v. Swan, 346 U.S. at 438, 74 S. Ct. at 188 (1953)). In order to determine whether such a conflict exists here it is necessary to examine the structure and purpose of the CEA.
is designed to avert the hazards inherent in the volatile sphere of commodities futures trading. Congress has regulated such trading for over 60 years, increasingly strengthening and extending the regulation by amendment. See generally, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran et al., 456 U.S. 353, 102 S. Ct. 1825, 1828, 72 L. Ed. 2d 182 (1982). An important component of that protection is a private cause of action which courts have long recognized for claims arising under the CEA. See Curran, supra, at , 102 S. Ct. at 1836. To supplement this judicial enforcement mechanism, Congress, in the 1974 amendments added two informal remedies for injured parties: (1) a reparations procedure before the CFTC,
and (2) in the case of futures contracts, an arbitration procedure to be established by the designated contract markets.
Curran, supra at , 102 S. Ct. at 1836.
The arbitration provision is extremely narrow in scope.
It requires each designated contract market to set up an arbitration procedure for the settlement of customers' claims against members of the market or their employees. Use of the procedure must be voluntary,
and is limited to claims under § 15,000.00. 7 U.S.C. § 7a(11).
In addition, it applies only to futures contracts. The fact that this provision was specifically included in the amendment implies that arbitration as a method of resolving CEA disputes was not considered by Congress to be otherwise permissible. Indeed, the arbitration and reparation procedures were described as "new customer protection features." 120 Cong. Rec. 10737 (1974) (remarks of Chairman Poage). Moreover, the limitations imposed on the arbitration procedure indicate a reluctance on the part of Congress to authorize arbitration as a general remedy for CEA claims. The short-comings of the arbitral forum compared to a judicial forum have been well recognized.
The factfinding process in arbitration usually is not the equivalent to judicial factfinding. The record of the arbitration proceedings is not as complete; the usual rules of evidence do not apply; and rights and procedures common to civil trials, such as discovery, compulsory process, cross-examination, and testimony under oath, are often severely limited or unavailable. See Bernhardt v. Polygraphic Co., 350 U.S. 198, 203 [, 76 S. Ct. 273, 276, 100 L. Ed. 199] (1956); Wilko v. Swan, 346 U.S. at 435-437 [, 74 S. Ct. at 187-188]. And as this Court has recognized, "arbitrators have no obligation to the court to give their reasons for an award." United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S.  at 598 [, 80 S. Ct. 1358 at 1361, 4 L. Ed. 2d 1424].
Alexander v. Gardner-Denver Co., 415 U.S. 36, 57-58, 94 S. Ct. 1011, 1024, 39 L. Ed. 2d 147 (1974). The protections provided in the judicial forum, however, are expensive and this expense can render pursuit of small claims infeasible. Accordingly, Congress limited the arbitration procedure to claims under $15,000, recognizing that there was "an 'economic impediment to Court litigation' only with small claims." Curran, supra, at , 102 S. Ct. at 1837.
As added protection, Congress sought to insure that these claims would be heard by those with some expertise in the commodities field. See, e.g., 40 Fed. Reg. 54430, 54431 (1975). This was accomplished in part by requiring the contract markets to establish arbitration procedures themselves or to delegate such claims to a registered futures association with established procedures. See 7 U.S.C. § 7a(11). The expertise provided in this arbitral forum compensates to some extent for the loss of procedural protections provided by a judicial forum.
In sum, it is implicit in this statutory scheme that arbitration is generally unsuitable for CEA claims except under the narrow circumstances delineated in 7 U.S.C. § 7a(11). Where a party advances claims which do not come within the scope of § 7a(11), I find that there is a conflict between the policies of the CEA and the Federal Arbitration Act. In the present case, plaintiffs' claims clearly exceed the $15,000 limit. Therefore, whether the agreement is determined to be a futures contract or a leverage contract, it is appropriate to rely on the protective legislation exception to the Federal Arbitration Act and deny enforcement of the arbitration clause. Other courts have come to the same conclusion. See, Bache Halsey Stuart, Inc. v. French, 425 F. Supp. 1231 (D.D.C. 1977); Milani v. Conticommodity Serv., Inc., 462 F. Supp. 405 (N.D. Cal. 1976); Arkoosh v. Dean Witter & Co., 415 F. Supp. 535 (D. Neb. 1976), aff'd. on other grounds, 571 F.2d 437 (8th Cir. 1978). Contra Romnes v. Bache & Co., Inc., 439 F. Supp. 833 (W.D. Wisc. 1977). Since the arbitration clause is not enforceable, plaintiffs are entitled to an injunction staying the arbitration of their CEA claims. See H. Prang Trucking, Inc., supra, at 1239.
Plaintiffs have asserted common law claims in addition to their CEA claims. It could be argued that their common law claims are subject to arbitration in accordance with the provision in the contract even if plaintiffs' federal statutory claims are exempted. However, where both nonarbitrable federal claims and common law claims are asserted and the claims are inextricably intertwined, arbitration should not be permitted. See Miley v. Oppenheimer & Co., 637 F.2d 318, 334-37 (5th Cir. 1981); Mansbach v. Prescott Ball & Turben, 598 F.2d 1017, 1030-31 (6th Cir. 1979); De Lancie v. Birr, Wilson & Co., 648 F.2d 1255, 1258-59 (9th Cir. 1981) (dicta); Sibley v. Tandy Corp., 543 F.2d 540 (5th Cir. 1976), cert. denied, 434 U.S. 824, 98 S. Ct. 71, 54 L. Ed. 2d 82 (1977); Fox v. Merrill Lynch & Co., 453 F. Supp. 561, 567 (S.D.N.Y. 1978). Contra Dickinson v. Heinold Securities, Inc., 661 F.2d 638 (7th Cir. 1981). In the present case, plaintiffs' common law and federal claims are, in my judgment, inextricably intertwined.
Plaintiffs' common law and federal claims arise out of the same set of operative facts. Indeed, plaintiffs' common law claims are addressed to the same alleged wrongs: misrepresentation of the risk involved in commodities trading and manipulation of their account.
In addition, the contract claim which defendant asserted in the arbitration proceeding is inextricably intertwined with plaintiffs' CEA claims. Defendant claims that the plaintiffs breached the trading agreement. Plaintiffs, however, assert that the trading agreement is in actuality an illegal futures contract. If plaintiffs succeed on that claim, the contract might well be unenforceable against them. In sum, I find that the arbitrable claims cannot be separated from the non-arbitrable CEA claims. Accordingly, I shall stay the arbitration initiated by the defendant in Michigan pending judicial resolution of the non-arbitrable CEA claims.
Plaintiffs have also moved for summary judgment on the Third Count of their amended complaint. This count alleges that defendant's cash forward contract is a futures contract illegally marketed off a licensed exchange in violation of the CEA.
Under Fed. R. Civ. P. 56(c), summary judgment may be granted only if there is no dispute as to a material fact and the moving party is entitled to judgment as a matter of law. In considering such a motion, I must view the evidence in a light most favorable to the party opposing the motion, drawing every reasonable inference in his or her favor. Small v. Seldows Stationery, 617 F.2d 992, 994 (3d Cir. 1980).
The sole issue to be determined on this motion is how to characterize the cash forward agreement marketed by the defendant. It is undisputed that the transactions made pursuant to this contract took place off a designated contract market. The plaintiffs contend that defendant's cash forward account is a futures contract which, under the CEA, must be traded on a designated contract market to be legal. Defendant contends that its cash forward is a leverage contract permitted under § 19 of the CEA, 7 U.S.C. § 23. Section 19 contracts are not required to be traded on designated contract markets. A brief description of the two types of contracts may be helpful.
The term "futures contract" is not expressly used in the CEA. What are commonly termed futures contracts are referred to in the CEA as "contracts of sale of a commodity for future delivery." See, e.g., 7 U.S.C. § 2. Among the distinguishing characteristics of a futures contract is its standardized form as to quantity and other terms. The standardization, set by the designated contract market, facilitates trading of the contracts. Although many of the traders never intend to take delivery of the underlying commodity, the contracts provide for uniform delivery points and delivery dates. Trading must take place on a licensed exchange designated by the CFTC as a "contract market" and prices are established by the competitive trading on the exchange.
A § 19 contract is defined as
a standardized contract commonly known to the trade as a margin account, margin contract, leverage account, or leverage contract, or . . . any contract, account, arrangement, scheme, or device that the Commission determines serves the same function or functions as such a standardized contract, or is marketed or managed in substantially the same manner as such a standardized contract.
7 U.S.C. § 23(a). In the legislative history of the 1978 amendments to the CEA, leverage transactions were described as follows:
Generally, the leverage contract currently in use is an agreement for the purchase or sale of a contract for the delivery at a later date of a specified commodity in a standard unit and quality, or the close-out of the contract by an offsetting transaction. The principal characteristics of the contract include: (1) standard units, quality, and terms and conditions; (2) payment and maintenance of "margin"; (3) close-out by an offsetting transaction or by delivery, after payment in full; and (4) no right or interest in a specific lot of the commodity. The leverage dealer is the principal to every transaction and functions as a market maker. The leverage dealer, however, does not guarantee a repurchase market and further reserves the right to cease operating as a market maker or broker for the customer. Most customer commitments are covered or "hedged" in futures, forwards, or physical inventory; most physical inventory, however, is encumbered through bank loans. Leverage contract bid/ask prices are determined by dealer adjustments to spot and futures market quotations.